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US CPIs Take Center Stage Ahead of Fed Decision; UK Jobs Data and Brexit Bill Vote in Focus as Well

USD-traders Lock Gaze on US CPIs Ahead of Tomorrow’s Fed Decision

The US dollar traded higher against most of the other G10 currencies on Monday. It underperformed only against SEK and AUD, while it gained the most versus JPY, GBP, EUR and CAD. The greenback traded virtually unchanged against NZD.

The currency that lost the most against its US counterpart was the yen, despite the G7 summit ending on a bitter note over the weekend. After he left the summit, US President Trump announced that he was backing out of the gathering’s joint communique. His decision followed comments by Canada’s PM Justin Trudeau, who at his press conference talked about countermeasures his nation would take in response to the steel and aluminum tariffs imposed by the US.

Although the outcome of the summit keeps uncertainty surrounding the global trade arena elevated, the safe-haven currencies, JPY and CHF, ended the day lower against the dollar, while major equity indices closed mostly in the green. Perhaps investors stayed complacent after Italy’s new Economy Minister Giovanni Tria said on Sunday that his government has no intention of leaving the Eurozone and pledged to focus on cutting debt levels. The prospect of a positive outcome at the historic summit between US President Trump and North Korea’s Kim may have also helped market sentiment to stay unaffected by the G7 outcome. The talks have started overnight, with Trump saying during the early European morning that the meeting was going “better than anybody could have expected”.

As for today, ahead of tomorrow’s FOMC decision, USD/JPY traders are likely to turn their attention back to economic indicators, and specifically, the US CPIs for May. Expectations are for the headline and core rates to have risen to +2.7% yoy and +2.2% yoy, from +2.5% and 2.1% respectively. Although the Fed drives the monetary policy wheel mostly based on the PCE inflation metrics, further acceleration of the CPIs above 2% could increase the likelihood for the PCEs to follow suit in the coming months.

The dollar could gain on speculation that Fed officials are unlikely to tolerate above target for long and perhaps consider an extra rate increase by year end. According to the Fed funds futures, the market is almost certain that the Fed will proceed with its next rate increase tomorrow and thus, we don’t expect a hike by itself to trigger market volatility. If indeed the Committee decides to push the hiking button, attention will quickly turn to the accompanying statement, the updated economic projections, and especially the new “dot plot”. Investors will be eager to see whether the Committee will continue to signal one more hike by the end of the year, or whether there will be an upside revision, pointing to an extra one. The Fed funds futures suggest that the probability for getting a 4th hike this year is around 41%.

USD/JPY – Technical Outlook

Yesterday, it was a good day of recovery for USD/JPY and we saw the pair closing the day in the positive zone. USD/JPY has been in an uptrend since it turned north on the 25th of March. The pair continues to hold above the mid-term upwards moving trendline, drawn exactly from the same date. Also, what we can notice is that on the shorter time-scale is that USD/JPY is forming a small rising channel.

For now, we remain bullish on USD/JPY, as we could see a continuation move higher within the aforementioned channel. The pair is above the key level of 110.25 and currently is aiming to make a move towards the 110.50 area, a break of which could open the path towards the 110.80 zone. There, USD/JPY could meet the upper bound of the channel. If the buying momentum remains strong, then there could be a possibility to see a break of that upper bound, and the pair could continue pushing towards the next key area of resistance at 111.40, marked by the high of 21st of May – the highest point in May.

On the downside, a move back below the 110.25 level, could interest a few bears in driving USD/JPY towards the 109.85 level, a break of which could send the pair to test the lower bound of the previously mentioned channel. If that area is not able to withhold USD/JPY from dropping further, then a test of the 109.20 level could become a reality. Slightly below that, the pair has another good level of support at 109.00, not to mention the mid-term upwards moving trendline, which could get tested as well, if the rate continues to slide lower.

UK Jobs Data and Withdrawal Bill Vote Under GBP-traders’ Microscope

The British pound traded lower against all but one of the other G10 currencies yesterday. It underperformed the most against SEK, AUD and NOK, while it gained only against the yen.

Sterling came under strong selling interest yesterday, after data showed that industrial production slid 0.8% mom in April after rising a mere 0.1% in March. The forecast was for a slight acceleration to +0.2%. The more-closely-watched manufacturing production tumbled as well. Specifically, it fell 1.4% mom, after sliding 0.1% in March, missing expectations of a rebound to +0.3% mom.

In our view, this is not the kind of data investors betting on a near-term BoE rate increase would like to see. The numbers suggest that economic momentum remained fragile at the start of the second quarter, even though May PMIs point to some stabilization thereafter.

As for today, GBP traders are likely to lock their gaze on the employment report for April as well as the UK political landscape. Getting the ball rolling with the jobs report, expectations are for the unemployment rate to have remained unchanged at a 42-year low of 4.2% in April, while average earnings including bonuses are anticipated to have risen at the same yearly pace as the previous month (+2.6% yoy). That said, we expect the market to pay more attention to the earnings excluding bonuses, the yearly rate of which is also expected to have held steady, at +2.9% yoy. At the press conference following the latest BoE meeting, Carney made it clear that the Bank pays more attention to regular pay, because of the way bonuses distort headline earnings.

According to the Markit UK Report on Jobs for the month, starting salaries for permanent workers continued to rise, with the rate of inflation picking up from March, while rates of pay for temporary staff rose to the greatest extent for two years. In our view this shifts the risks surrounding the earnings forecasts to the upside.

Accelerating wages, especially net of bonuses, could revive hopes with regards to a near-term BoE rate hike, perhaps as early as August, and could thereby help the pound recover some of yesterday’s lost ground. Nonetheless, even if this is the case, we would stay on guard, as tomorrow we get the nation’s inflation data for May. We would like to see a combination of accelerating wages and rising inflation rates before we assume that the August-hike case has strengthen notably.

On the political front, the House of Commons will vote on proposed amendments to the government’s EU withdrawal bill. Prime Minister Theresa May will seek to overturn changes made by the House of Lords, one of which is the meaningful vote amendment. The Lords’ amendment would allow parliament to determine the government’s course of action in case MPs reject a Brexit deal, or in case the EU and the UK are not able to find a common ground. On the other hand, the government’s proposal suggests that MPs could still vote down a Brexit deal, but they would not be able to direct future actions.

If the Prime Minister is defeated, this could increase concerns over new elections and could complicate further the negotiating process with the EU. Any data-related pound gains are likely to stay limited as the lack of progress on the Brexit front could also weigh on BoE’s future policy decisions.

GBP/CAD – Technical Outlook

GBP/CAD has been in a downtrend since the pair turned south on the 19th of March. Even though it managed to regain some lost grounds in the end of May, still the recovery was not enough to convince the bulls that it is time to jump in. The pair is currently testing from underneath the mid-term downwards moving trendline, taken from the high of 26th of March. Until that trendline is broken, we will remain somewhat more bearish rather than bullish.

A strong move and eventually a break of the 1.7315 level, that was yesterday’s low, could initiate some more selling and GBP/CAD could drop to 1.7250 or even slightly lower, to the 1.7200 mark. If the rate continues to fall, the bears will be more than happy to drive the pair towards the next key area of support of 1.7135. Slightly below that, near the 1.7055 level, lies the lowest point of May, which could be seen as a potential area for a test as well.

Alternatively, if the aforementioned mid-term trendline gets violated and we see a strong push through that line, then finally the bulls will have a chance to redeem themselves and drive GBP/CAD towards previous key resistance levels. If the pair easily pierces through the 1.7435 and the 1.7475 levels, then we would expect to see more bulls joining in the action and moving GBP/CAD higher. The next potential zones of resistance to keep an eye on could be the 1.7570 and 1.7625 levels.

As for the Rest of Today’s Events

During the European morning, Germany’s ZEW survey for June is coming out. Expectations are for the current conditions index to have declined to 85.0 from 87.4, while the expectations one is forecast to have slid to -14.6 from -8.2.

In the US, besides the CPI data, we also get the NFIB small business optimism index for May.

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